Priority tax claims, as referenced in 11 U.S.C. 507(a)(8), include the following categories:
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Discharging Taxes in Bankruptcy – Part Two
Secured claims are defined as those claims secured by a lien on the debtor’s property. The claim can only be secured “to the extent of the value of the property securing the claim. For example, a claim for $40,000 secured by a piece of property worth $10,000 would be a secured claim of $10,000 and either a priority tax claim or a general unsecured claim of $30,000” (Armknecht). When it is discovered that a creditor has a lien on a property that also has a superior lien “in excess of the value of the property, [then] the claim is not secured” (Armknecht). In essence, a preexisting lien determines the priorities of other creditors. The presence of a tax lien will determine whether the lien is a priority tax claim or a general unsecured claim. The amount of the lien is dependent upon the value of the property. “If the amount of the superior lien is less than the value of the property upon which the IRS filed its lien, then the IRS will have a secured claim to the extent of that the value of the property exceeds the value of the superior lien” (Armknecht). The remaining balance of the tax claim is still subject to the provisions that govern priority of claims under section 507 of the U.S. code.
Key Takeaways
- Go to Brotman Tax Resolution Services
- Go to The Brotman Virtual Law Office
- Go to Resource Blog Homepage
Discharging Taxes in Bankruptcy – Part One
When the debtor files a petition for bankruptcy relief, this action immediately affects the collection of taxes. Debtors should first familiarize themselves with preferred tax resolution methods specific to innocent spouse relief, a request for abatement of penalties, an installment agreement, or an offer in compromise (OIC). “Using administrative tax resolution methods instead of bankruptcy may help clients avoid having a ‘black mark’ on their credit history. However, a federal tax lien listed on the debtor’s credit report may damage his or her credit rating as much as a bankruptcy notation” (JournalofAccountancy.com, “Discharging Taxes in Bankruptcy,” 8/15/2013). When the standard options are not sufficient, petitioning for bankruptcy relief may be appropriate.
Key Takeaways
- When the debtor files a petition for bankruptcy relief, this action immediately affects the collection of taxes.
- In addition, trust fund taxes are also specific to those obligations that fall under the categories of sales taxes. The collected taxes are held in trust by the debtor. The funds are sent to the appropriate taxing authority.
Chapter 13 Bankruptcy
Chapter 13 bankruptcy is an option for individual debt adjustment under the U.S. Bankruptcy Code. Chapter 13 is a wage earner’s plan, which “enables individuals with regular income to develop a plan to repay all or part of their debts” (USCourts.gov, “Bankruptcy Basics PDF, p. 22,” 8/15/2013). Under chapter 13, the debtor proposes a repayment plan which allows for installments to be paid to creditors. When the debtor’s currently monthly income is less than the applicable state median, the plan will be for three years; however, the court reserves the right to approve a longer period. When the debtor’s current monthly income is greater than the applicable state median, the plan must be for five years. In this context, the plan cannot include payments that exceed five years. During the repayment period, “the law forbids creditors from starting or continuing collection efforts” (p. 22).
Key Takeaways
- The greatest advantage of choosing chapter 13 over the other options is that with chapter 7, debtors can save their homes from foreclosure (p. 22).
- Filing chapter 13 offers another advantage. This option allows debtors to reschedule secured debts (other than a mortgage of a primary residence) and extend the debts over the life of the plan. Extending the debt repayment period helps to lower the payments.
- Lastly, chapter 13 acts similarly to a consolidation loan whereby the debtor makes the plan payments to the chapter 13 trustee. Individuals have no direct contact with their creditors.
Small Business Owner Bankruptcy Cases
In small business owner cases, the debtor may not be required to file a separate disclosure statement, provided that the “court determines that adequate information is contained in the [reorganization] plan” (“Bankruptcy Basics, p. 30). With this in mind, small business bankruptcy cases are treated differently than regular bankruptcy cases.
Key Takeaways
- In small business owner cases, the debtor may not be required to file a separate disclosure statement, provided that the “court determines that adequate information is contained in the [reorganization] plan” (“Bankruptcy Basics, p. 30).
- For example, to determine the classification of small business debtor, the debtor must pass a two-part test.
- The small business debtor is required to submit with the petition a recently prepared balance sheet, a statement of operations, a cash flow statement, and the most recently filed tax return.
Chapter 11 Bankruptcy
Chapter 11 bankruptcy is a form of reorganization under the U.S. Bankruptcy Code. The requirements specific to an individual debtor work much the same as those outlined under chapter 7. However, with chapter 11 bankruptcy, a petition may be voluntary or involuntary. When the petition is involuntary, it is filed by creditors that meet certain requirements (“Bankruptcy Basics, p. 29”). Voluntary petitions require adherence to a prescribed format; debtors must use “Form 1 of the Official Forms prescribed by the Judicial Conference of the United States” (p. 29).
Key Takeaways
- The types of documents that debtors must file are similar to those required under chapter 7, but they are also specific to businesses.
- Voluntary petitions reference standard information, which includes the debtor’s name, social security number and identification, residence, location of principal assets, debtor’s plan to file, and request for relief.
- Chapter 11 bankruptcy relief allows the debtor, in general, to create a liquidating plan. This type of plan allows the debtor to liquidate the business “under more economically advantageous circumstances than a chapter 7 liquidation” (p. 39).
Chapter 7 Bankruptcy
Chapter 7 bankruptcy is a form of liquidation under the U.S. Bankruptcy Code. Under Chapter 7, the trustee of the bankruptcy court “gathers and sells the debtor’s nonexempt assets and uses the proceeds of such assets to pay holders of claims (creditors) in accordance with the provisions of the Bankruptcy Code” (USCourts.gov, “Bankruptcy Basics PDF, p. 14), 8/15/2013). Within this context, the debtor’s property can be subject to lien and mortgages, pledging the property to other creditors. The Bankruptcy Code allows the debtor to keep certain property that falls under “exempt.” Other non-exempt remaining assets will be liquidated. In essence, filing under Chapter 7 may result in the loss of property.
Key Takeaways
- Qualifying for relief requires a debtor to fall under one or more categories, which may include individual, partnership, corporation, or other business entity. There are limitations with regard to eligibility.
- Filing for chapter 7 bankruptcy relief “automatically stays” most collection actions. “The stay arises by operation of law and requires no judicial action.
The Collection Statute Expiration Date
The Collection Statute Expiration Date (CSED) falls under Section 19[1] of the Internal Revenue Manual (IRM). The CSED refers to the idea that every tax assessment has a statute of limitations. The rules and procedures for the CSED are governed by statute, namely section 6502(a) of the Restructuring and Reform Act of 1998 (RRA 98).
Key Takeaways
- According to the IRM, each tax assessment has a collection statute expiration date, or CSED (IRS.gov, “Part 5. Collecting Process, Chapter 1. Field Collecting Procedures, Section 19. Collection Statute Expiration,” 8/17/2013).
- If you file for bankruptcy, because of the automatic stay imposed by the proceedings, the CSED is generally suspended.
- The CSED is extended throughout the duration of the bankruptcy proceedings plus six months. It is extended on non-dischargeable tax liabilities, from the date of filing for bankruptcy to the date the bankruptcy is either discharged or dismissed.
Psychological Effect of IRS Collections
Achieving financial stability should be a lifelong goal. Developing financial plans and meeting long-term objectives is a lengthy process that requires patience, discipline, and endurance. What happens when your plans are disturbed because of past and present financial issues that threaten to destroy your future? Bankruptcy is one of those financial problems that take into consideration your past, your present, and your future.
Key Takeaways
- Achieving financial stability should be a lifelong goal. Developing financial plans and meeting long-term objectives is a lengthy process that requires patience, discipline, and endurance.
- What you have done with money up to this point will dictate, in essence, how money will be distributed from the income you bring in. Now you must develop a debt repayment plan and lose a significant percentage of your income to repaying old debts.
- A money crisis is taxing on the mental state. This is especially significant for filers of bankruptcy.
IRS Wage Garnishment Protocol
Wage garnishment is the most common type of garnishment, or attachment to earnings and/or assets. Wage garnishment is defined as the process of deducting money from an employee’s wages, or monetary compensation, as a result of a court order or related equitable procedure. A wage garnishment will continue until the entire debt is paid. There are common examples of different types of debts that result in wage garnishment. These types include child support, defaulted student loans, taxes, and unpaid court fines.
Key Takeaways
- When employers receive a notice to withhold part of an employee’s wages, the garnishment becomes a part of the payroll process. Employers are required to make the deductions until the debt is satisfied.
- The deductions above are required by law. The deductions that are not required by law include union dues, health and life insurance, and charitable contributions (“Wage and Hours Worked: Wage Garnishment”).
- However, Title III allows for the garnishment of wages at a greater amount when it comes to child support, bankruptcy, and/or federal or state tax payments (“Wages and Hours Worked”).